New Zealand Property Investors' Federation

The NZPIF is the umbrella body for 20 local Property Investors' Associations throughout New Zealand.

(027) 357 9243

www@nzpif.org.nz

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15-06-2007

Rises, rises all around

The Reserve Bank’s surprise move to increase its official cash rate last week to 8% means that floating and short-term rates are heading higher.

Longer-term rates are being driven upwards too as the wholesale rates (at which banks lend to fund residential mortgages) have been steadily rising over the past couple of weeks.

The outlook isn’t too flash either. Most economists believe that the Reserve Bank will hike the OCR at least one more time and maybe as early as next month.

Added to that the price war amongst lenders appears to be over for now, meaning competition is no longer a borrower’s friend as it has been for the past couple of years.

The difficulty of the situation was perhaps best summed up by this comment from an economist: “Fix last week.”

If you need money, lock in a rate as soon as you can before more increases come through.

What’s making it even harder for borrowers is that there is no real evidence to show how successful the central bank has been at slowing the economy by increasing interest rates.

Another economist summed this up in equally colloquial lingo as the one previously noted when he said we are in the “suck it and see” part of the cycle. The Reserve Bank has done its thing, only time will tell if it works.

Further clouding the picture is the Reserve Bank’s intervention in the currency market early this week. While all the attention has been on what this means for exporters, it also impacts on monetary policy and borrowers.

Since the intervention came as a surprise, a little like the recent OCR increase, economists are being cautious in their assessment on what it means.

Borrowers caught in this seemingly unrelenting upward trend just have to grin and bear the pain. For those taking out new loans the pain is perhaps a little less obvious than for those who are rolling over or refixing existing loans which have been on significantly lower rates than those now being offered.

There is no simple answer to the question what is the best strategy at the moment. One option is to fix for around two-years in anticipation that at the next roll over point rates will be lower.

Another option, for those more convinced that rates will start to fall next year and fall quickly, is to take a shorter-term, one-year fixed rate option.

The key point here is that this is a slightly higher cost option as one year rates for mainstream banks, according to interest rate website www.goodreturns.co.nz, are sitting at 9.30% compared to two-year rates of 9.25%.

Currently floating rates from banks are sitting at 10.30%. Standard two-year rates are 9.25%, while three and five year rates are at 9.15% and 8.95%. There are some cheaper options around from non-bank lenders, however the range of rates is tighter than it has been previously.

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